As income inequality rises, saving rates increase (except column 6), these results support the Classical approach. The marginal propensity to save for the rich people in UHC is higher, so total savings increase as inequality increases. As seen in Table 14, while the results are robust for the innovation channel, the negative effect of fixed capital variable on income inequality does not support the Classical approach. While many studies in the literature examine the direct relationship between relevant variables, some focus only on bilateral relationships such as income inequality-channel variable or channel variable-economic growth. Studies that determine whether the effect of income inequality on economic growth occurs through a channel focus mainly on some of the negative channels stated in theory.

The Impact of Income Inequality on Economic Growth Through Channels in the European Union

Therefore, it can be said that the specific characteristics of the countries are also important for the validity of the analysed channel. This study aims to determine whether the effect of income inequality on economic growth is realised through transmission channels theoretically expressed. This relationship is examined for 143 countries and the periods between 1980 and 2017 https://istorepreowned.co.za/ through positive and negative channels.

Similarly, the inflation rate has a significant negative effect on growth, except for a few models. The fact that a high inflation level, as an indicator of macroeconomic instability, harms the economic growth in these countries supports Stockman (1981). Similar results are obtained in other studies such as Iradian (2005), Chletsos and Fatouros (2016), Babu et al. (2016), Braun et al. (2019), using inflation as a control variable in the inequality-growth empirical literature. The effects of the other two control variables on growth are not clear, and the data scarcity problem in low-income countries limits forecasts.

• Finally, Table 7 shows the effect of inequality, a positive channel, on patent and saving rates.
• On the other hand, although inequality does not have significant effects directly on political instability, it can still harm economic growth as it negatively affects investment (Nel, 2003).
• Therefore, as stated by Demirguc-Kunt (2012), these countries primarily need stable macroeconomic policies and strong legal and information systems for the development of the financial system.
• However, in models where the redistribution is significant (columns 4 and 4a), the coefficient is positive, similar to LLMC.

Method and Dataset

Table 20 shows that the effect of different human capital channel variables on economic growth is not significant for UHC; hence, when interpreted together with the results here, the importance of human capital in developing countries is revealed. The effect of inequality on political https://personal.nedbank.co.za/ stability is significantly negative (except column 2), unlike LLMC, and these results are consistent with the theoretical view. Considering together with the results obtained for LLMC, it can be said that the relationship between income inequality and instability is not linear. Blanco and Grier (2009) stated that inequality can reduce political instability after a certain threshold. Considering that low-income countries have relatively high levels of inequality, it can be said that the results support Blanco and Grier (2009) study, as these countries may have exceeded this threshold.

Similar content being viewed by others

Therefore, it is stated that in countries with high-income inequality, increasing fertility rates will reduce economic growth (Galor & Weil, 1996; Galor & Zang, 1997; Kremer & Chen, 2002; De La Croix and Doepke, 2003). A fair and sustainable economic and social welfare is one of the goals of macroeconomic policies. Concerning this purpose, the primary goal of macroeconomic stabilisation policies is to achieve stable economic growth, especially as it is also a critical factor in reducing global poverty. As long as policymakers fail to achieve their sustainable economic growth goals, they reconsider their decisions towards these goals (Mijiyawa, 2008; Piece, 2012). On the other hand, it is claimed that policies aimed at reducing income inequality promote long-term sustainable growth effectively (Berg & Ostry, 2011; Ostry et al., 2014). The hypothesis that income inequality increases in the early stages of economic development while it decreases in later stages has been tested from different angles in many studies.

Although the robustness of the results is controlled by using panel estimation techniques and different indicators, there are also some limitations of this study. Especially in low and lower-middle income countries, there may be missing observations regarding the selected variables. Data limitations prevent detailed analysis using different variables or methods, especially in these countries.

The Relationship Between Income Inequality and Economic Growth: Are Transmission Channels Effective?

The last channel that suggests that income inequality negatively affects economic growth patrice motsepe trading platform is the differential fertility approach. It is claimed that income inequality determines fertility rates and indirectly affects human capital investment and economic growth negatively. In countries with high fertility rates, economic growth is expected to decline due to diminishing capital per capita. The relationship between income inequality and fertility rate is explained by education level. While low-income families have more children and low investment in education, the opposite will happen for affluent families.

Several studies have predicted that the effect of income inequality on economic growth will be positive. The earliest studies concluded that income inequality promotes economic growth by increasing savings https://www.bidvestbank.co.za/ (Bourguignon, 1981; Kaldor, 1955; Keynes, 1920; Lewis, 1954). Under the linearity assumption of the saving function, the total saving behaviour in the economy is independent of income and wealth distribution, independence disappears under a non-linear saving function (Stiglitz, 1969). The marginal propensity to save from profits is greater than the propensity to save from wages, and this is the condition of stability.

Some empirical evidence shows that high inequality will adversely affect economic growth as it causes socio-political instability (Castells-Quintana & Royuela, 2017; Mo, 2009; Odedokun & Round, 2004; Perotti, 1996). On the other hand, although inequality does not have significant effects directly on political instability, it can still harm economic growth as it negatively affects investment (Nel, 2003). Therefore, although we do not find direct empirical evidence, it can be concluded that the negative impact of income inequality on economic growth through the socio-political instability channel may be more important in low-income countries. In summary, the relationship between income inequality and economic growth is not very clear and further investigation is needed to understand this relationship more clearly.

The negative impact of these channels on economic growth is more pronounced in relatively low-income countries. Although the increase in the fertility rate negatively affects economic growth in both country groups, this effect is more significant in LLMC. Families should focus on investing more in their human capital by having fewer children instead of having more children. Therefore, especially in low-income countries, governments can raise awareness of families with various education policies. Similarly, although there are no direct effects on growth, economic growth improves in low-income countries due to the positive impact of developed financial systems on human capital. Therefore, as stated by Demirguc-Kunt (2012), these countries primarily need stable macroeconomic policies and strong legal and information systems for the development of the financial agc motsepe system.